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Her Majesty's Revenue and Customs (HMRC) has issued guidance that virtual currencies are taxed as barter transactions, similar to the rules in the USA. Essentially you are taxed on the capital gain of an asset at the time the asset is disposed (e.g. sold, traded, used for a purchase, etc.). Some exceptions may apply (also if you are deemed by HRMC to be a "frequent trader" then you are subject to Income Tax treatment instead of Capital Gains treatment).
The capital gain is the difference between the GBP value of the disposed asset at the time of the disposition minus the GBP value of the disposed asset at the time it was acquired.
For UK residents, you are allowed an allowance of capital gains that are non-taxed for individuals up to £11,300 in capital gains across all capital assets for the April 6, 2017 – April 5, 2018 tax year (different exemptions apply if you live in Scotland or are domiciled outside the UK).
Allowances for tax-free capital gains in the UK by year (source)
Cryptocurrency gifts to your spouse are also non-taxed and can effectively allow you to double your tax-free allowance in a given tax year. Gifts to charity are also tax free. See details on HRMC's website.
Consider the following scenarios:
- Purchase 1 BTC for £100 and then sell it for £10,000. Additional £1,000 in capital gains from stocks. Capital gain is £9,900 from BTC + £1,000 = £10,900. Therefore no capital gains tax filing is needed and no capital gains taxes are due.
- Purchase 1 BTC for £100 and then sell it for £20,000. Capital gain is £19,900. Taxes are due on this amount based on your capital gains tax rate.
- Purchase 10 BTC for £80,000. Gift half of them to your husband. Then you each sell 5 BTC for £50,000 (for a total of £100,000). Capital gains are £20,000, but split across two individuals so below the £11,300 threshold per person. Therefore no capital gains taxes are due. Nonetheless, since the disposition value per person exceeds four times the allowance (£45,200), a filing still needs to be made.
Note: regardless of the allowance, you are required to file your UK taxes if your proceeds for the 2017 – 2018 tax year were >£45,200 OR your capital gains (before losses — not net capital gains) were >£11,300. There may be additional reasons when you are required to file as well. For the 2016 & 2017 tax years, the thresholds are £44,400; £11,100 and for 2015: £44,000; £11,000.
The HRMC requires share pool accounting when calculating the cost basis of a coin disposition (CoinTracker offers this option in the settings for UK users). When you spend/sell/trade cryptocurrency, you will be treated as disposing them in the following order:
- Same Day Rule: coins acquired on the same day as the disposal are consumed first
- Bed and Breakfasting Rule: coins acquired in the 30 days following the day of disposal (provided the person making the disposal was resident in the United Kingdom at the time of the acquisition)
- Crypto-pool rule: all previous coins purchased, price averaged
Here's an example: let's say that you make the following purchases:
- May 1: 0.25 BTC @ £1,000/BTC
- June 2: 0.25 BTC @ £2,000/BTC
- July 3: 0.25 BTC @ £3,000/BTC
- August 4: 0.25 BTC @ £4,000/BTC
- Then on December 31, you buy an additional 0.25 BTC for £5,000/BTC, and then later that night sell 0.5 BTC at £5,000/BTC.
- Two weeks later, you buy an additional 0.1 BTC for £10,000/BTC
Applying the rules above, your BTC is priced and disposed of as follows:
- Same day: 0.25 BTC for 0.25 * £5,000 = £1,250
- Bed and Breakfasting Rule: 0.1 BTC for 0.1 * £10,000 = £1,000
- Crypto-pool rule: (0.5 BTC - 0.25 BTC - 0.1 BTC) = 0.15 BTC for 0.15 * (0.25 * £1,000 + 0.25 * £2,000 + 0.25 * £3,000 + 0.25 * £4,000) / 1 BTC = £375
So the total cost of the 0.5 BTC sold on December 31 comes to £1,250 + £1,000 + £375 = £2,625.
Note: in the case of multiple purchases at different prices in a given day, average the cost of all transactions into one combined transaction for that day when determining cost basis (TCGA92/S105(1)). in the case of multiple purchases at different prices in a 30-day bed and breakfasting period, apply FIFO (first-in, first-out) logic for calculating cost basis of the previous sale.
You can also claim capital losses and use them to offset capital gains in the same tax year, or in future tax years. See here for more details.
With lack of clear guidance here, the default seems to be apply the same rules as in the USA.
When mining coins, the fair market value of the coin at the time you gain possession of the coin will be income incurred and the cost basis for future capital gains/losses. Starting with the 17/18 tax year, the UK allows £1,000 of trading income tax free. So for example if your only trading income in the year was £800, then you would not have to report this mining income. If it was £1,200, then you would have to report it and pay income tax on £200.
When staking coins, HMRC has not released clear guidance. Reasonable arguments can be made for staking rewards to be treated as savings income or dividend income. The UK allows some tax exemptions here.
You can report in 'real time' using the Capital Gains Tax service or annually in a Self Assessment tax return. If you use the 'real time' service but need to send a tax return for another reason, you’ll have to report your gains again through Self Assessment. After you have reported your capital gains, HMRC will send you a letter/e-mail with a payment reference number and directions on how you can pay.
In addition to your completed Capital Gains Summary (instructions), the HRMC requires that you need keep records of all your transactions for at least a year after the Self Assessment deadline (longer in some cases). Make sure to keep detailed records yourself, or you can use CoinTracker's tax product and we'll create a capital gains report with all of this information for you.
You can also get help with your tax return from an accountant or tax adviser.
When To Report
The UK tax year is from April 6 — April 5 the following year. Paper returns are due by midnight on October 31 and electronic returns are due by midnight on January 31 the following year. Taxes are also due by midnight on January 31 the following year. For additional details around deadlines, see here.
How to Pay
HMRC will tell you how much you owe. The tax you pay depends on your Income Tax rate.
You’ll have to pay a penalty if you send your tax return late, miss the payment deadline or send an inaccurate return.